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Beef brisket or pulled pork? Yes, please.

By Beth Reed and Nicholas
Colas

Be it BBQ judging, investing, picking out an
outfit, or even choosing whether or not you’re
going to show up for work tomorrow –
there’s a decision making process occurring. Quite
simply, decision making is the cognitive process resulting in
the selection of a final choice among several alternative
scenarios. Final choices can be opinions (as in "This brisket
is an 8") or actions (such as "I will invest in tech stocks"),
and decisions are both conscious and unconscious. For
investors, financial decisions and how we tend to arrive at
them are of particular importance. Today’s note is
both an informatory lesson on how to properly judge a pork rib
and a cautionary tale of "Top 10" common biases that creep into
the decision making process. Recognizing and eliminating these
biases from your financial choices will make you a sharper and
smarter investor… or BBQ judge… or whatever it is
that you do.

(Note From Nick: For years I have been
considering entering the Hells Angels of Long Island Chili
Cook-off. First prize is a trophy in the shape of a
Harley-Davidson fuel tank. Second prize… Well, fear of
second prize is what’s kept me out of the contest.
Beth, on the other hand, has had a better idea: be a judge at
cooking events rather than compete. But to do the job right,
you need some serious tasting skills and a process. Today, Beth
reviews how it’s all done and what it means for
investing.)

My latest hobby and longest, most-important
sounding title of my career: Kansas City Barbeque Society
(KCBS) Certified Barbeque Judge. Basically it means
I’m qualified to judge BBQ chicken, ribs, pulled
pork, beef brisket and (my favorite) burnt ends at any
KCBS-sponsored event in the world. I’m under oath
to "subjectively evaluate each Barbeque meat" that is presented
to me so that "truth, justice, excellence in Barbeque and the
American Way of Life may be strengthened and preserved
forever." Yes, we take our mission seriously.

At a typical competition, I will taste chicken,
ribs, pork shoulder and brisket from six different competition
cook teams. Proper judging usually dictates at least two bites
of each meat, so that’s 48 bites per outing plus
another 10 or so more for the irresistible ones, in which case
I allow myself to eat the whole sample. It’s not a
shabby lunch.

So how does judging work? Here are the basics:

We use a scale of 2-9 to rate the meat in three categories:
Appearance, Taste and Tenderness. A 6 is average, while a 2 is
inedible (literally – if you swallow it, then it has
to be at least a 3) and a 9 is "Excellent."

Teams can receive a score of 1, meaning disqualification,
for things like meat sculpting, using illegal garnish and
foreign objects in the turn-in box (most often an inadvertent
wood chip, though hair is perfectly okay).

If pork is "falling off the bone good" then
it’s overcooked, so you should ding the tenderness
score.

Brisket must pass a "Pull
test" without crumbling, and smoke rings should be ignored
because they can be artificially induced. Sauce and garnish
violations automatically result in a score of 1 on
Appearance.

Obviously BBQ judging is mostly of a subjective
nature, but the use of a "Hedonic scale" minimizes confusions
by assigning a qualifier to each number. So rather than rating
a piece of chicken simply "7," we know that a 7 implies "Above
average." Hedonic scales were originally developed to measure
the food preference of soldiers, because having food that the
troops liked increased morale and thus improved efficiency. But
more recently, such scales are popular in marketing research
and tasting panels where respondents indicate the extent to
which they like or dislike a food product. The 9-point scale
used by the KCBS is the most common, as it alleviates the
decision making process by making it more qualitative in
nature.

Unfortunately, though, most of life’s
decisions don’t involve a plate of meat and neatly
organized scale. Decisions in the financial arena are
especially complex and are complicated by a host of outside
forces. As an investor, in particular, you should be aware that
you’re subject to biases which occur during the
decision making process. Recognizing and minimizing their
importance in your financial choices will make you that much
better off and (hopefully) quite a bit richer.

Read on below for our list of the 10 most common
biases affecting the psychology of investing.

1)Anchoring & Adjustment: This combination
occurs when initial information unduly influences decisions by
shaping the view of subsequent information. Once the "anchor"
or initial information is set, there exists a bias for
interpreting other information around the anchor. Car salesmen
frequently use this tactic when presenting an initial sales
price, making the subsequent negotiated prices seem lower than
the initial price even though they are still higher than what
the vehicle is actually worth.

2) Attribution Asymmetry:
The concept here involves people’s tendency to
attribute success to internal characteristics (such as talent
and innate abilities) and to attribute failures to external
factors (like simple bad luck). Research has shown the reverse
to be true when evaluating the successes and failures of
others. The lesson here is most valuable when you hit a "hot
streak." When you experience speed bumps, don’t be
quick to write them off as poor luck – there could be
a fundamental problem with your strategy.

3) Choice-Supportive
Bias: By distorting recollections of chosen courses of
action versus the rejected courses of action, people tend to
make the chosen outcomes seem more attractive that the foregone
ones. Just as people more frequently remember "good" memories
than they do "neutral" or "bad" memories, the belief that "I
chose this option therefore it must have be superior" can lead
to a false recollection of the ultimate outcome. Learn from
your mistakes – don’t forget them.

4) Cognitive Inertia:
This is just psychological speak for the unwillingness to
change thought patterns in light of new circumstances. Quite
simply, do your homework and keep up on your investments. If a
company slashes guidance, for example, perhaps you should
consider altering your investment accordingly.

5) Incremental Decision Making
& Escalating Commitment: These biases occur when
people view a decision as a small step within a larger process,
rather than as a singular choice. As a result, this viewpoint
perpetuates a series of similar decisions, when perhaps many of
those decisions should be evaluated with a fresh mind.

6) Group Think: Grown-up
lingo for peer pressure, group think occurs when one feels
compelled to adhere to opinions held by a larger group. This
one’s easy – don’t let
others sway your opinion. Groups tend to form a singular
opinion based on the opinion of the loudest or most influential
person in the group. Doesn’t mean
he’s right.

7) Prospect Theory: This
theory explains that people are more likely to take on risk
when evaluating potential losses; though in looking at
potential gains, humans have the tendency to be risk-averse. In
other words, losses feel worse than gains feel good.

8) Repetition Bias: The
bias results from the willingness to believe what one has been
told most often and by the greatest number of different
sources. Remember all the hoopla over Facebook’s
IPO? And then its year one performance? Yeah, everybody though
it was a hot stock and only now has it drifted above its IPO
price.

9) Sunk-Cost Fallacy: If
someone makes a decision about a current situation, based all
or in part on what they have previously invested (money, time
or otherwise) in the situation, they are suffering from
sunk-cost fallacy. Not matter how much you’re down
on an investment, if it’s likely to never be
recovered, then cut your losses and let it go.

10) Wishful Thinking:
This "problem" happens when people are too optimistic; wanting
to see things in a positive light can distort perception and
objective thinking. Just because you really really really want
your investment to appreciate, doesn’t mean it
will. Investing should not be treated as gambling.

Decision making may seem an elementary topic
– after all most decisions are made unconsciously
given that we just don’t have time to sit down and
weigh the pros and cons of each choice we make – but
when decisions are of the financial nature, it
can’t hurt to overanalyze. Things like "think for
yourself" and "see the facts objectively" may seem obvious, but
it’s quite amazing how often such basic concepts
are forgotten amidst the abundance of investment
decision-making literature out there. Behavioral psychologists
have long debated biases in judgment and decision making, and
we’ve weeded out the 10 most common. Simply
knowing they exist and being aware they have many victims will
give you an edge and a fresh perspective. Happy investing.

Nicholas Colas is the chief market
strategist and Beth Reed is a v.p. for market strategy at
ConvergEx Group, a global brokerage company based in New
York.

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